- Individual FTX losses can either be claimed as ‘capital loss’ or ‘theft loss.’
- Capital loss can offset business or job income by upto $3,000.
- Theft loss can offset any income without any limit.
Finally, Sam Bankman-Fried (SBF) is arrested, and now around 1 million individual investors can hope for closure and might even get their money back. Sam’s prosecution will determine whether the IRS treats FTX losses as ‘capital losses’ or ‘theft losses.’
Founded on July 1, 1862, The Internal Revenue Service (IRS) is a US Government Agency responsible for collecting taxes and enforcing tax laws in the country. The agency if often mocked as one not seeing major offenders of US tax laws and grill the general public for minor faults in their annual filings. The agency hasn’t audited FTX even once despite FTX gaining immense capital and becoming the world’s third-largest crypto exchange in just 5 years.
— JohnGWE (@JohnGWEl) December 14, 2022
Former White Knight of the crypto industry, SBF has been slapped with criminal charges by US authorities. Although the final decision regarding his sentence is yet to come, the wheel has started to turn in investors’ favor.
The losses can be claimed as ‘capital loss’ or ‘theft loss’ under Ponzi schemes.
In the case of ‘capital loss.’
Initially it was believed that assets lost to FTX shall be considered as capital loss under US tax code 2022, as this can than be used to offset capital gains. However, given the fact that the whole crypto maket suffered major losses, most of the investors might not have any capital gains to offset in 2022.
A capital loss in theory can be used to offset “ordinary income” meaning the money earned through salary or business amounting to $3000 per year.
If it’s considered ‘theft loss’
It could be a more favourable scenario for the investors if they were to claim it as theft loss deduction, as this can be used to offset any income without any limit. However, it is quite difficult to claim because it attracts IRS scrutiny. But the theft loss code also offers a safe harbor for Ponzi Schemes, and if an investor can demonstrate a Ponzi Scheme loss, IRS shall not ask for additional documentations.
Can FTX be considered a Ponzi scheme?
It is evident that the assets were mishandled and illegally diverted to Alameda. This seems enough evidence for IRS to categorize FTX as a Ponzi scheme. To be termed a Ponzi scheme, FTX or SBF has to be charged, and SBF must confess.
What should investors do now?
The individual tax filing deadline is of April 18, 2023. There’s still time to see how things turn out. Anyone shall be ill-advised if planning to claim the capital losses now.
Source: https://www.thecoinrepublic.com/2022/12/25/how-does-the-irs-treat-your-ftx-losses-sbfs-prosecution-will-tell/